The Reform And The Optimal Property Rights Arrangement Of SOEs

The literatures of the research on the reform of property rights in State-Owned-Enterprises (SOEs) have been increasing since 1978 when the reform and opening-up policy were implemented. Economists at home and abroad made unremitting efforts to explore a path of reform in line with China's national conditions. Existing research can be divided into two categories. One is the theory that puts emphasis on market competition. The other is the theory that stresses the importance of private property rights. Market competition and property rights are both important. However, these theories can neither be integrated with each other, nor make an explanation about the reality of property rights reform of SOEs. Three questions are raised in the research of property rights reform of China's SOEs. (1) Why private property rights does not work at the early stage of the reform, although it is regarded as the most effective form by classical property rights theory. (2) What is the optimal property rights arrangement in China's SOEs. (3) How to assess the property rights reform of China's SOEs. Why the property rights arrangement, such as the separation of ownership and control, and contracting system, which had ever improved the productivity of SOEs greatly became the bottleneck of future development at last.Based on the research of special nature of China's SOEs and the environment in which they are developed, this paper uses the theory of transaction costs and contract choice to build a model about the optimal property rights arrangement of SOEs on the perspective of transaction costs. This model combines static analysis with dynamic analysis, and can give answers to three questions confusing us.Institution is divided into two areas in New Institutional Economics. They are institutional environment and institutional arrangement. The property rights arrangement is the most critical economic institutional arrangement, while political and legal environment is the institutional environment in which property rights arrangement is built and develops. Property rights arrangement and political and legal environment have a combined effect on transaction costs. On the one hand, the optimal institutional arrangement can not only minimize transaction costs under the constraints of political and legal environment, but also evolves with the change of political and legal environment. On the other hand, the change of political and legal environment is depended on the evolvement of property rights arrangement. But political and legal environment is sticky, the change of which is gradual and slow. As a result, the special nature of China's SOEs as well as the political and legal environment in which they are built should be considered in order to analyze the optimal property rights arrangment.The political and legal environment in which China's SOEs are embedded is special. SOEs were one part of centralized planning system before reform. During the reform, political and legal mechanism adaptive to market economy was formed and improved gradually. Because of the particularity of the environment in which China's SOEs are embedded, the nature of the contracts as well as transaction costs of China's SOEs is different from that in private enterprises. Firm is considered as a nexus of contracts. As a special form of enterprise, China's SOEs can also be regarded as a nexus of special contracts. The particularity was reflected in the following aspects. Firstly, the initial principal of SOEs is all the people in China who lack the capacity to sign contracts. Secondly, owing to the absent of the initial principal, it is inevitable to form a principal-agent chain based on administrative level. There are three levels in this chain, including political, administrative and economic principal-agency relationship. Thirdly, the objectives of principals at all levels in this principal-agent chain are multiple, including economic and non-economic objectives. Fourthly, it is by administrative appointment system that managers of SOEs are chosen. As a result, there are three types of transaction costs in China's SOEs, which include productive agency cost, administrative agency cost and information cost. Productive agency cost arises in the economic principal-agency relationship. It is the reduction of SOEs' efficiency caused by the distortion of productive and nonproductive action of enterprise managers. Administrative agency cost arises in the administrative principal-agency relationship. It is the reduction of social welfare caused by the distortion of the action of local government, state owned asset management organization and relevant government departments. Information cost is the reduction of enterprise efficiency owing to the lack of some essential internal and external management capability of decision-makers.The optimal property rights arrangement of SOEs is the form that can minimize transaction costs under the restraint of political and legal environment. A valuable conclusion can be drawn from the model of optimal property rights arrangement made in this paper. With the lack institution infrastructure adaptive to market economy, private property rights cannot run effectively. State-owned property rights can minimize transaction costs in this political and legal environment. When the political and legal mechanisms adaptive to market economy are developed gradually, the separation of ownership and control is the optimal property rights arrangement. When a perfect political and legal mechanism adaptive to market economy is built, private property rights will be the optimal form. On the other hand, the change of political and legal environment is depended on the evolvement of property rights arrangement, because property rights arrangement determines the rules of competition. However, political and legal environment is sticky. The buildup of political and legal mechanisms adaptive to market economy is a gradual process. The optimal property rights arrangement will evolve with the change of political and legal environment.Three questions confused us can be answered by this model. (1) In the early stage of the reform, political and legal mechanisms are adapted to centrally planned economy, in which most economic activities had still been controlled by national mandatory plan. SOEs' privatization will produce high transaction costs. (2) The optimal property rights arrangement of SOEs is the form that can minimize transaction costs under the restraints of political and legal environment. In addition, this is a dynamic process, during which the optimal property rights will evolve with the change of political and legal environment. (3) With the gradual improvement of the political and legal mechanisms adaptive to market economy, the property rights reform of China's SOEs in general competitive sectors has gone through several stages, including the separation of ownership and control, contracting system, the setting up of modern enterprise system and privatization. The property rights arrangement at every stage is a second best choice under the political and legal environment at that time. Moreover, the transaction costs continued to decline with the establishment of socialist market economy system and the development of property rights reform of SOEs.This paper analyzes the optimal property rights arrangement of SOEs based on the perspective of transaction costs, and no longer regards the optimal property rights arrangement as a static institutional arrangement, but a dynamic process endogenous in political and legal environment. During this process, the optimal property rights arrangement not only evolves with the change of political and legal environment, but also promotes the change of political and legal environment. These two aspects are functioning mutually. As a result, a model of property rights reform of SOEs in line with China's national conditions can be built, and the innovations on analysis paradigm and research conclusion are realized in this paper.